IMPACT OF PETROLEUM SECTOR REVENUE AND ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

Taxation is one of the oldest and most important source of government revenue in Nigeria. It has been in existence even before the amalgamation of Nigeria in 1914 as a political entity. It occupies a central place in the revenue generation of the government and control.

Oil and crude oil production and the revenue derived from it remains the prime mover of Nigeria economy. as at today the country’s major balance of payment, exchange rate policy, monetary and fiscal policies are dependent on revenue from oil.

Revenue from oil has played a vital role in the execution of various national development plans and still continue to do so. During the country’s first plan period (1962-1968), the control of the oil industry was solely in the hands of the multinationals. Oil royalties and petroleum by the oil companies under the Petroleum Profit Tax Act of 1967 (as subsequently amended).

Initially, the 1957 Act established the basic principles of equal sharing of profit between government and oil companies. This was achieved by fixing the rate of tax, certain receipt of government in other forms, such as rent and royalties and also duties charged by federal and state government in Nigeria. However amendment in early 1967 introduced more favourable features as far as government was concerned. Following the broad pattern already established in those major oil producing countries whose governments were members of OPEC (Organization of Petroleum Exporting Countries).

The industries also contributes to the country’s balance of payment indirectly through the inflows of foreign exchange to purchase Nigeria’s currency so as to meet local commitment such as contractors and suppliers bills, salaries and wages and labour dues paid on behalf of the suppliers of crude oil export.

The most noticeable source of Nigeria revenue and foreign exchange earnings to the country is the oil. This accounts for as much as 90% of the country’s total export earning and total revenue of government.

With this, so much attention is given to administration of petroleum profit tax. However the first commercial production of oil in the world took place in Romania and the united state in the 1850s.

Commercial discovery of oil in Nigeria did not take place until 1950s although the shell BP had earlier started some exploration work shortly before the Second World War.

Nigeria is the largest producer and exporter of crude petroleum in Africa South of the Sabara.

Nigeria is a member of the organization of petroleum exporting countries (OPEC).

It’s good quality varies between light crude of 45o average of 32o API and heavy crude of 21o API with weighted average of 32o API.

The Nigeria oil has an incredible low sulphur content averaging only 0.2% of all other major producer only Libya and Indonesia have qualities which may be regarded as comparable.

Taxation of petroleum operation started in 1959 with the enactment of PPT-Petroleum profit tax. The petroleum profit department is responsible for the assessment and collection of:

a) PPT from exploration and producing companies.

b) CIT from oil servicing companies.

c) CIT from oil marketing and pioneer companies

d) Education tax oil companies that are liable to either PPT or CIT.

No matter where an oil producing or servicing company or pioneer company is located in Nigeria, its tax matter are handed by the petroleum profit department, unlike the CIT where the registered address of the business is used to determine registration. The law and agreement that govern the PPT law collection are as follows:-

a) PPT Act of 1959 as amended to date.

b) Associated Gas Fiscal Arrangement (AGFA) of 1997, 1998 and 1999 Budget Decree no. 18, 19 and 20 of 1998 provides more details.

c) Production sharing control (PSC) of 1993. The PSC deals with exploration and production of deep offshore territorial water of Nigeria. Decree No. 9 of 1999.

d) Memorandum of Understanding (MOU) of 2000. It was signed in July 1999 and effective from January 2000. By the provision of selection 55 of PPTA a company that is liable to the PPT cannot be liable to CIT on the same income.

STATEMENT OF THE RESEARCH PROBLEM

Petroleum Profit Tax is a tax paid by oil company involved in oil exploration and marketing. With the production of 5,100 barrels per day in 1958, the volume of production in the country. Multiplied impressively over the year to 2.3 million barrels per day in 1979. Until recently when the problem of Niger-Delta began to affect production by over 30% of cut in production. Little or nothing compared to what is supposed to be realized from petroleum profit tax mainly because of these factors.

· The calculation of petroleum profit tax is demanding partly as a result of the complexity of petroleum operation and partly because of the legislation in Nigeria.

· The administration of petroleum profit tax at the highest level has taken a political dimension due to the enormous amount involved. This has been married by corruption with most recent case of the Halliburton multinational bribery scandal, which the case never, saw the light of the day in Nigeria.

· The chargeable profit are based on national price (referred to as posted) and partly because certain expenditure items are treated differently e.g. fiscal allowance rather that deprecation.

The tax is also reduced in respect of certain payments to government known as offsets in Nigeria. Such as royalties on locally produced oil, non-productive rents incurred by the company during that period and custom duties on essential items and finally investment tax credit. This factor of tax reduction was before January 1st 1995. Only companies engaged in petroleum operation pay tax at posted price.

In the light of the above, the relevant research questions are:

1. What is the relationship between revenue from Petroleum Profit Tax (PPT) and Gross Domestic Product (GDP)?

2. Has the Petroleum Profit Tax Act of 1967 as amended for the collection and usage by federal government increased the expected development of the nation in general?

3. What is the relationship between revenue from petroleum profit tax and total tax revenue?

RESEARCH OBJECTIVE

The objective of this research work includes the following:

1. To examine the relationship between revenue from Petroleum Profit Tax (PPT) and Gross Domestic Product (GDP).

2. To examine if the Petroleum Profit Tax Act of 1967 as amended for the collection and usage by the federal government has increased the expected development of the nation in general.

3. To examine the relationship between revenue from petroleum profit tax and total revenue.

STATEMENT OF HYPOTHESIS

This aspect of the research work is concerned with the acceptance or rejection of decision.

The research hypothesis relevant to the above stated questions and objective were:

1. There is a positive relationship between revenue from Petroleum Profit Tax (PPT) and Gross Domestic Product (GDP).

2. The Petroleum Profit Tax Act of 1967 as amended for the collection and usage by federal government has increased the expected development of the nation in general.

3. There is a position relationship between revenue from petroleum profit tax and total tax revenue.

SCOPE OF THE STUDY

This study covers the adoption, implementation, impacts and problem of PPT collection and recommendation on the (PPTA) in Nigeria. Also the subject matter of this study is “Tax Administration from Petroleum Profit in Nigeria”.

The time period for the research is for the period of five years (2004 to 2008) fiscal year.

The sample size is more concerned with Nigeria’s Federal Inland Revenue Service of Edo State. Geographically, the study which will be specifically be restricted to Edo and Delta States in Nigeria.

RELEVANCE AND SIGNIFICANCE OF THE STUDY

This research work is being undertaken in order to bring to light the bright prospects and impact of PPT as a source of revenue in Nigeria and as it affects the general price level of economic activities in the country.

Much attention of revenue generated in Nigeria is focused on the oil industry, which made this research most significant. Yet it has not really attended it full potential through it generates over 90% of government revenue.

Petroleum profit tax administration is very significant in the sense that, if the proceeds are well put into use and accounted for, it will yield almost double of what is expected and the immediate impact of these will be enormous on all aspect of Nigeria economy.